Tug-of-war over shareholder proposals for lobbying disclosure

Just like the 2017 Consolidated Appropriations Act, the 2018 Consolidated Appropriations Act expressly precluded the use of any of the appropriated funds for issuance or implementation by the SEC of any rule regarding the disclosure of political contributions, contributions to tax exempt organizations or dues paid to trade associations. Not that political spending/corporate lobbying disclosure rules were a hot prospect at the SEC these days anyway. So what’s a political spending/lobbying disclosure true believer to do? Shareholder proposals, of course. After all, private ordering seemed to work for proxy access. And now it seems like everyone is getting into the act.

Just like the 2017 Consolidated Appropriations Act, the 2018 Consolidated Appropriations Act expressly precluded the use of any of the appropriated funds for issuance or implementation by the SEC of any rule regarding the disclosure of political contributions, contributions to tax exempt organizations or dues paid to trade associations. Not that political spending/corporate lobbying disclosure rules were a hot prospect at the SEC these days anyway. So what’s a political spending/lobbying disclosure true believer to do? Shareholder proposals, of course. After all, private ordering seemed to work for proxy access. And now it seems like everyone is getting into the act.

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Keep in mind that, notwithstanding the perennial reluctance of the SEC to adopt rules requiring disclosure of corporate political spending and lobbying, new SEC Commissioner Robert Jackson was co-chair of the bipartisan committee of law professors that submitted a rulemaking petition requesting the SEC to move forward with political spending disclosure rules). The SEC received over a million comments on the petition, most of which were in favor. Time will tell if Jackson will ultimately be able to parlay his position on the Commission to realize that goal.

According to Alliance Advisors, about 50 lobbying and 30 political contribution proposals are expected in 2018. And this post from representatives of Walden Asset Management and AFSCME in the Harvard Law School Forum on Corporate Governance and Financial Regulation reports that proposals have been submitted to 50 companies by a coalition of public pension funds, labor funds, asset managers, individual investors, international investors, foundations and religious investors asking for lobbying reports that include federal and state lobbying payments, payments to trade associations used for lobbying, and payments to any tax-exempt organizations that write and endorse model legislation. The post reports that companies spent about $2.6 billion in 2017 on federal lobbying and over $1 billion at the state level. That’s not counting the $100 million spent annually by trade associations, such as the U.S. Chamber of Commerce (over $1.4 billion on lobbying since 1998).

Not that anyone is sanguine about the chances for adoption of shareholder proposals for political spending/lobbying disclosure, at least not yet. According to this article by the Conference Board, in 2017, the 57 proposals requesting political spending /lobbying disclosure that were submitted for votes “received average support of 25.8 percent of votes cast, up slightly from 2016 when the average support was 24 percent for the 67 proposals. While no proposals on this topic passed in 2017, two proposals received support of over 40 percent of for votes.” But votes of 40% in favor may be enough to pressure companies into looking hard at responding to the vote. And, Alliance indicates, “support levels could eventually creep up. The Center for Political Accountability (CPA) and Fund Votes reported that of the 114 fund groups they track, 56 increased their support for political spending disclosure resolutions between 2016 and 2017.” However, some of the biggest asset managers, such as BlackRock and Vanguard, “have maintained their longstanding approach of opposing or abstaining on all election spending resolutions.”

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But there are some exceptions to BlackRock’s position. In its 2018 Proxy Voting Guidelines for U.S. Securities, BlackRock indicated that it does not generally support any proposals requesting shareholder votes on political activities or expenditures or proposals related to corporate disclosure of political activity if they are overly prescriptive, but may support proposals requesting additional disclosure “where there seems to be either a significant potential threat or actual harm to shareholders’ interests and where [it believes] the company has not already provided shareholders with sufficient information to assess the company’s management of the risk.” (See this PubCo post.)

A number of the proposals submitted by the coalition requested preparation of a report providing full disclosure of the company’s “direct and indirect lobbying activities and expenditures,” with the stated purpose of facilitating assessments of whether the company’s lobbying is “consistent with its expressed goals and in the best interests of shareholders.” In addition to lobbying policies and payments, the proposals request information about memberships in and payments to certain tax-exempt organizations that write and endorse model legislation, as well as descriptions of the company’s decision-making process and oversight of these payments.

In their supporting statements, the coalition proponents express concern that “this lack of disclosure presents reputational risks” that arise out of possible contradictions between the companies’ stated policies and public face and the trade associations’ lobbying efforts. For example, a company’s policy may advocate meaningful action on climate change, while the trade association of which it is a member and which it funds has taken action to challenge governmental efforts to address climate change, or the company may publicly support efforts to stop smoking while the company’s trade association works against legislation that would curb smoking.

But what’s novel this year is the entry into the arena of shareholder proponents from the other end of the political spectrum. For 2018, the National Center For Public Policy Research, which has been described as a “conservative research and communications foundation,” has submitted lobbying disclosure proposals, modeled precisely on the proposals submitted by the coalition, to several companies, also requesting full disclosure of the same types of lobbying expenditures, as shown in this proposal to Duke Energy. While the proposal itself is practically identical in terms of the disclosures requested, the difference is in the supporting statement, which has quite a different slant on the issue: the supporting statement argues that the company “has become a target for anti-free speech activists. These activists are working to defund pro-business organizations by attacking their corporate members. The Company should take an active role in combating this narrative and attacks on its freedom of association rights. The Company should be proud of its memberships in trade associations and non-profits groups that promote pro-business, pro-growth initiatives.” In addition, the NCPPR supporting statement recommends that, “[r]ather than letting outside agitators set the message that these relationships are somehow nefarious, the Company should explain the benefits of its involvement with groups that advocate for smaller government, lower taxes and free-market reforms. The Company should show how these relationships benefit shareholders, increase jobs and wages, help local communities and generally advance the Company’s interests.”

And this interesting piece in the WSJ reports that these “shadow” proposals from NCPPR are being submitted as a tactic to effectively preempt similar later-submitted proposals from more left-leaning organizations (such as the coalition above): if identical proposals are submitted to a company, the subsequent proposal can be excluded, under SEC rules, on the basis that it is “substantially duplicative” of the earlier proposal submitted by another shareholder. The article indicates that, with regard to an NCPPR lobbying disclosure proposal to GE, NCPPR’s documents arrived at GE two days before the “nearly identical proposal from the New York State Common Retirement Fund.” The general counsel of NCPPR told the WSJ that he “‘knew the liberals were going to file their resolution blasting membership [in certain trade and lobby groups]…so I filed a resolution with the same language.’” The proposals and related engagement, the article reports, are also helping this proponent to “promote and engage with company management on conservative social-policy issues.” According to the article, a day after NCPPR submitted its proposal to Duke Energy, a “virtually identical proposal arrived from a social-investing group, the Sisters of St. Francis of Philadelphia.” Even though it will lead to the defeat of the lobbying proposal, the article advises that the Sisters intend to vote against the NCPPR proposal “‘since the philosophy of the [NCPPR] is quite different from ours.” Apparently, the NCPPR intends to continue this practice, “not least because its new first-come, first-served submission tactic is scoring points with relatively few resources. ‘Compared to the billions of dollars that the left puts toward this, we would never be able to catch up….So we will just chip away, as much as we can.’”

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